Knowledge and Insights

In today’s competitive job market, offering comprehensive employee benefit plans can be a game-changer for attracting and retaining top talent. However, sponsoring an employee benefit plan comes with a set of fiduciary responsibilities that are crucial to the plan’s success and compliance with regulatory standards. Fortunately, there are a variety of best practices plan sponsors and administrators can implement to ensure fiduciary responsibilities are met, and in doing so can ensure the effective and compliant management of employee benefit plans.

UNDERSTANDING FIDUCIARY RESPONSIBILITIES FOR EMPLOYEE BENEFIT PLANS

As a plan sponsor, or the individual charged with the plan administrator responsibilities, you hold a fiduciary role under the Employee Retirement Income Security Act (ERISA). This means you have a legal obligation to act solely in the interest of plan participants and beneficiaries. Below are key considerations and fiduciary duties to aid you in your duties as a plan sponsor, plan administrator, or in your role serving on a plan oversight committee.

LOYALTY TO PLAN PARTICIPANTS

Your primary responsibility is to act with an undivided loyalty to the plan participants. This means avoiding conflicts of interest and making decisions that benefit the participants and beneficiaries rather than your own or the plan sponsor’s interests.

PRUDENCE & DILIGENCE

This duty requires you to act with the care, skill, prudence, and diligence that an individual familiar with such matters would use. This includes making informed decisions, conducting regular reviews, and seeking expert advice when necessary.

DIVERSIFY INVESTMENTS

To minimize the risk of large losses, you must ensure that the plan’s investments are diversified. This involves regularly reviewing and adjusting the investment options available to participants, including the fees being charged to the participants.

DUTY TO FOLLOW PLAN DOCUMENTS

You must adhere to the terms of the plan documents, as long as they comply with ERISA. This includes following the plan’s procedures for making decisions and ensuring that the plan is operated in accordance with its terms.  An audit of the plan’s financial statements will focus heavily on compliance with the plan documents.

BEST PRACTICES FOR PLAN SPONSORS

To effectively manage your fiduciary responsibilities, consider implementing the following best practices:

ESTABLISH A FIDUCIARY COMMITTEE

Forming a fiduciary committee can help distribute the responsibilities and provide a system of checks and balances. This committee should include individuals with expertise in finance, HR, and legal matters related to employee benefit plans.  The fiduciary committee should meet regularly throughout the year.

DOCUMENT DECISIONS & PROCESSES

As part of the fiduciary committee minutes, maintain thorough documentation of all decisions and processes related to the plan. This includes meeting minutes, investment reviews, and any changes made to the plan. It’s also important to document why certain changes were not made to the plan.  Proper documentation can serve as evidence that you have fulfilled your fiduciary duties.

CONDUCT REGULAR TRAINING

Ensure that all fiduciaries receive regular training on their responsibilities and the latest regulatory updates. This will help them stay informed and make better decisions in the interest of the plan participants.

MONITOR SERVICE PROVIDERS

If you outsource certain plan functions to service providers, such as investment managers or recordkeepers, you must monitor their performance and ensure they are acting in the best interest of the plan participants. This involves conducting regular reviews and renegotiating contracts when necessary.  Most service providers involved in processing plan and payroll transactions will have a Service Organization Control (SOC 1) report available.  The fiduciary committee should review this and document its considerations regarding any required controls and any issues identified in the SOC 1 report.

REVIEW & UPDATE THE INVESTMENT POLICY STATEMENT (IPS)

An Investment Policy Statement (IPS) outlines the plan’s investment objectives and guidelines. Regularly review and update the IPS to ensure it remains relevant and aligned with the plan’s goals. This document serves as a roadmap for making investment decisions and helps demonstrate that you are fulfilling your fiduciary duties.

CONDUCT REGULAR PLAN AUDITS

Regularly auditing the plan can help identify and address any compliance issues or areas for improvement. This includes reviewing the plan’s financial statements, participant data, and administrative processes.  The formal plan audit requirement is driven by the participant count at the beginning of the plan year; however, the fiduciary committee may decide it’s in the plan’s best interest to have an audit, or certain procedures, performed on the plan even when not required.

COMMUNICATE WITH PARTICIPANTS

Effective communication with plan participants is essential. Provide clear and timely information about the plan’s features, investment options, and any changes that may affect them. This helps participants make informed decisions and fosters trust in the plan’s management.

STAY INFORMED ABOUT REGULATORY CHANGES

ERISA and other regulations governing employee benefit plans are subject to change. Stay informed about any updates or new requirements to ensure your plan remains compliant. This may involve consulting with legal experts or subscribing to industry newsletters.

THE IMPORTANCE OF COMPLIANCE

Non-compliance with fiduciary responsibilities can lead to severe consequences, including financial penalties, legal action, and reputational damage. By adhering to the best practices outlined above, you can mitigate these risks and ensure that your plan operates smoothly and effectively.  Engaging outside professionals to assist with your continued compliance is critical to the continued success and operation of the plan.

KEY TAKEAWAYS

As a plan sponsor, fulfilling your fiduciary responsibilities is not just a legal obligation but also a commitment to the well-being of your employees. By implementing best practices such as establishing a fiduciary committee, conducting regular training, and maintaining thorough documentation, you can effectively manage your plan and provide valuable benefits to your employees.

The key to successful plan management is staying informed, proactive, and dedicated to the best interests of your plan participants. By doing so, you can foster a positive work environment, attract and retain top talent, and ensure the long-term success of your employee benefit plan.

MERCADIEN: YOUR PARTNER FOR EMPLOYEE BENEFIT PLAN AUDITS

Mercadien’s Employee Benefit Plan Audit Group has extensive experience with plans of all sizes and structures, including 401(k) and 403(b) plans, and we have worked closely with our clients to help navigate various changes over the years. Contact us today to learn more about how we can assist you and your organization with this transition and discuss how we can provide support with other audit and compliance matters related to your plan.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.